In re Trailer Source, Inc.

• Citation: 555 F.3d 231
• Decision Date: 06 February 2009
• Docket Number: No. 07-5584.,No. 07-5891.,07-5584.,07-5891.
• Parties: In re TRAILER SOURCE, INC., Debtor. Hyundai Translead, Inc., Appellee, v. Jackson Truck & Trailer Repair, Inc.; James A. Harrell; Raleigh J. Williams; Mark Lazarus, Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

555 F.3d 231

In re TRAILER SOURCE, INC., Debtor Hyundai Translead, Inc., Appellee, v. Jackson Truck & Trailer Repair, Inc.; James A. Harrell; Raleigh J. Williams; Mark Lazarus, Appellants.

No. 07-5584.

No. 07-5891.

United States Court of Appeals, Sixth Circuit.

Argued: June 5, 2008.

Decided and Filed: February 6, 2009.

ARGUED:

John C. Hayworth, Walker, Tipps & Malone, Nashville, Tennessee, for Appellants. Colin W. Wied, C.W. Wied Professional Corp., San Diego, California, for Appellee.

ON BRIEF:

John C. Hayworth, John L. Farringer IV, Walker, Tipps & Malone, Nashville, Tennessee, Paul G. Jennings, Bass, Berry & Sims, Nashville, Tennessee, for Appellants. Colin W. Wied, C.W. Wied Professional Corp., San Diego, California, James E. Bailey III, Farris, Mathews, Branan, Bobango, Hellen & Dunlap, Memphis, Tennessee, for Appellee.

Before MERRITT, MOORE, and ROGERS, Circuit Judges.

MOORE, J., delivered the opinion of the court, in which MERRITT, J. joined. ROGERS, J. (pp. 246-54), delivered a separate dissenting opinion.

OPINION

KAREN NELSON MOORE, Circuit Judge.

In this bankruptcy case, Appellants Jackson Truck & Trailer Repair, Inc., James A. Harrell, Raleigh J. Williams, and Mark Lazarus (collectively "the JT & T parties") appeal the district court's order granting Appellee Hyundai Translead, Inc. ("Hyundai") derivative standing to bring an action on behalf of the bankruptcy estate to recover certain assets that Hyundai alleges were fraudulently transferred from the debtor Trailer Source, Inc., to the JT & T parties. We granted permission for an interlocutory appeal on the question of whether a creditor may be granted derivative standing to bring an action pursuant to 11 U.S.C. §§ 544(b) and 550(a) on behalf of the bankruptcy estate for avoidance of fraudulent or preferential transfers in light of the Supreme Court's decision in Hartford Underwriters Insurance Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000). The JT & T parties also appeal the district court's order granting Hyundai relief from the automatic stay so that it may proceed in a separate district-court action asserting fraudulent-transfer claims against the JT & T parties to recover the assets allegedly transferred from Trailer Source. The district court reversed contrary orders by the bankruptcy court. Hyundai argues that the JT & T parties lack prudential appellate standing to pursue this appeal. For the reasons explained below, we conclude that the JT & T parties have appellate standing to pursue this appeal; we AFFIRM the district court's ruling granting Hyundai derivative standing; and we REVERSE the district court's grant of stay relief to Hyundai.

I. BACKGROUND¹

Hyundai is a manufacturer of semi-truck trailers. In 2000, Hyundai sold a large quantity of trailers to Southern Trailer & Equipment Sales, Inc. ("Southern Trailer"), a trailer dealership in which appellants James A. Harrell ("Harrell") and Raleigh Williams ("Williams") owned a majority interest. Harrell and Williams also owned a majority interest in two other dealerships: appellant Jackson Truck & Trailer Repair, Inc. ("Jackson Truck & Trailer"), and the debtor in this case, Trailer Source, Inc. ("Trailer Source").²

In 2002, Hyundai filed a civil action in California state court against the JT & T parties, Southern Trailer, and Trailer Source. Hyundai alleged that it had delivered more than $44 million in trailers to Southern Trailer but had received only $26 million in payment. Hyundai alleged that there were fraudulent conveyances of trailers from Southern Trailer to the two other dealerships that otherwise could have satisfied Southern Trailer's debt to Hyundai. In August 2002, Hyundai entered into a settlement and security agreement ("California Settlement") with all of the defendants in the California action. Under the terms of that agreement, Trailer Source and Southern Trailer agreed to a schedule for payment of the remaining $18 million debt to Hyundai, and Hyundai obtained a security interest in the assets of both Trailer Source and Southern Trailer.

In October 2003, Trailer Source defaulted on its obligations under the California Settlement. On June 30, 2004, Hyundai filed suit in the United States District Court for the Middle District of Tennessee alleging that the JT & T parties had established a scheme to transfer fraudulently trailers and cash from Trailer Source and Southern Trailer to Jackson Truck & Trailer, preventing the first two dealerships from making their scheduled payments to Hyundai pursuant to the California Settlement.

On January 6, 2005, Hyundai filed an involuntary Chapter 7 bankruptcy petition against Trailer Source, and on February 14, 2005, the United States Bankruptcy Court for the Middle District of Tennessee entered an order of relief, which automatically stayed the proceedings in Hyundai's separate action in the United States District Court for the Middle District of Tennessee against the JT & T parties. A number of parties, including Hyundai and the JT & T parties, subsequently filed as creditors of Trailer Source.

Soon after appointment of a trustee, Hyundai contacted the trustee to request an investigation of the fraudulent-transfer claims and consideration of an action by the trustee against the JT & T parties. At first, the trustee proposed that he employ Hyundai's own counsel at Hyundai's expense to conduct an investigation, but the trustee withdrew this suggestion after the JT & T parties argued that Hyundai had a conflict of interest. On November 8, 2005, the trustee also offered to sell the cause of action to Hyundai, but Hyundai declined because of concerns about the legality of such a transaction. Hyundai then made a demand upon the trustee to pursue an avoidance action against the JT & T parties. Under 11 U.S.C. §§ 544(b) and 550(a), a bankruptcy trustee may seek to avoid certain transfers of a debtor's assets and to recover assets that were wrongfully transferred. After the trustee declined to pursue an avoidance action, Hyundai filed a motion asking the bankruptcy court to grant Hyundai derivative standing to pursue the avoidance action on behalf of the bankruptcy estate.

That motion was opposed by the JT & T parties, and the bankruptcy court held a hearing on February 7, 2006. At that hearing, the trustee explained that he did not pursue the fraudulent-transfer claims primarily because the estate lacked funds to pay the investigation and litigation costs and he "could not retain competent counsel in a case like this to go forward on a contingency fee basis. It's not going to happen." Joint Appendix ("J.A.") at 441 (Hr'g Tr. 2/7/06 at 31). The trustee also explained that "the merits of the case was part of it" and "[t]he economics was part of it," and further cited the "weird situation with the district court." J.A. at 57 (Dist. Ct. Op. at 4). On February 21, 2006, the bankruptcy court denied Hyundai's motion for derivative standing. J.A. at 39-41 (Order on Mot. for Derivative Standing). The bankruptcy court concluded that Hyundai had not made the requisite showing that the fraudulent-transfer claims were "colorable" so as to establish derivative standing under Canadian Pacific Forest Products, Ltd. v. J.D. Irving, Ltd. (In re The Gibson Group, Inc.), 66 F.3d 1436 (6th Cir.1995). The bankruptcy court also concluded that the trustee's refusal to pursue the claims was based on the trustee's business judgment that "an outside law firm would not likely take the case on a contingency basis due to its merits." J.A. at 40 (Order on Mot. for Derivative Standing at 2). Finally, the court expressed reservations about the viability of the derivative-standing doctrine in light of the Supreme Court's decision in Hartford Underwriters Insurance Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000). After it was denied derivative standing, Hyundai filed a timely proof of claim in the amount of $19,441,768. J.A. at 184 (Proof of Claim).

On February 17, 2006, four days before the bankruptcy court's ruling on derivative standing, Hyundai filed a motion for relief from the automatic stay so that it could pursue its separate district-court action against the JT & T parties. Later that day, the trustee filed a motion for approval of a settlement of the estate's fraudulent-transfer claims against the JT & T parties. Under that agreement ("Bankruptcy Settlement"), the JT & T parties agreed to pay $50,000 to settle all of the fraudulent-transfer claims. On March 3, 2006, Hyundai filed a motion for reconsideration of the order denying it derivative standing. After a hearing on March 28, 2006, the bankruptcy court approved the Bankruptcy Settlement and denied Hyundai's motion for reconsideration.

Following a hearing on May 2, 2006, the bankruptcy court also denied Hyundai's motion for relief from the stay. Hyundai had argued that it had security interests in certain collateral that could not be settled by the trustee in the Bankruptcy Settlement. However, the bankruptcy court ruled that Hyundai's motion was moot because all of Hyundai's claims were encompassed within the Bankruptcy Settlement. Further, the court ruled that Hyundai had failed to show that relief was appropriate pursuant to 11 U.S.C. § 362(d)(1) or (2).

On June 6, 2006, Hyundai appealed the following orders of the bankruptcy court to the district court: (1) the order approving the Bankruptcy Settlement, (2) the order denying Hyundai derivative standing, (3) the order denying Hyundai's motion to reconsider that denial, and (4) the order denying Hyundai's motion for relief from the automatic stay. The district court reversed all of the orders except the order denying reconsideration. First, the district court found that the bankruptcy court abused its discretion in approving the Bankruptcy Settlement because it did not set forth adequate findings in support of its order and because the record contained facts...